All I Want For Christmas Is An Interest Rate Hike?
Today’s Spotlight Market
The short-end of the yield curve has been affected the most from the belief of a Fed rate hike with the 2-year note yield rising by 13 basis points the past month. For the year, the yield has risen by 39 basis points to 0.97%. As a comparison, the 5-year note has seen only a modest 5 basis point yield rise the past month. For the year, the 5-year note yield is up only 13 basis points to 1.70%.? The 2-year/10-year yield curve continues to flatten falling 10 basis points the past month to 1.30%.
Fundamentals
It appears that Traders now appear convinced that the Federal Reserve (Fed) will finally announce an interest rate increase of an expected 25 basis points on Wednesday following the conclusion of the December Federal Open Market Committee Meeting (FOMC). Among the reasons cited by traders for the Fed to finally take action on rates include a positive trend of economic data of late, as well as some signs of wage pressures for sectors of the work force that could lead to wage inflation going forward. However, one cannot help but wonder if the real reason the Fed will move on rates this afternoon is more a question of losing credibility in the eyes of market participants as the Fed has hinted of rate increase in the past year, but always failed to take action citing economic headwinds that in hindsight were very temporary in nature.
The real focus among economist will not be on the rate announcement but in the wording of the statement following the announcement. Here the text will be scrutinized for clues on when any following rate hikes will occur and to what extent the Fed hopes to bring interests rates too eventually as they move towards a more ?normal? interest rate environment. The current thought is that we could see anywhere between 3 to 5 additional 25 basis point rate hikes in 2016 which would bring the Fed Funds rate to somewhere between 1 and 1.5% by the end of next year. However, if history is any guide, the Fed will most likely state that any further rate hikes will be ?data dependent? and traders should not expect much more than a very moderate pace of interest rate increases in the next 2 to 3 years, barring any major inflation shocks that as of now do not appear in the horizon.
Technical Notes? – View Today’s Chart
To try to filter out some of the ?noise? seen in the market the past several sessions, we are going to take a look at the weekly continuation chart for the e-mini S&P 500 futures. Here we notice that the long-term trend is still favoring the bull camp as the trend-line drawn from the major low back in 2009 has not even been challenged since October 2011. More recent trading activity has prices relatively range bound within a 100 point rage bounded by 2000.00 on the downside and 2100.00 on the upside. We are starting to see the 20-day moving converge with the 100-day moving average. The last time this occurred was back in December 2011 where this convergence was very short lived, and signaled a sharp price rally that has lasted nearly 4 years! The 14-week RSI has turned neutral with a current reading of 50.20. Support is seen at 1982.50 with resistance found at 2110.25.
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